Sunday, November 20, 2011

I have always maintained that a 'true' virtual currency will have at least three attributes: two-way convertibility, floating exchange rate, and privacy (or anonymity). Any currency without those attributes is merely an extension of the existing payment structure or a surrogate currency like a glorified coupon. There are some strong legal reasons for companies electing not to support those attributes, including regulation as a US-based licensed money service business and strict AML (anti-money laundering) guidelines. In writing for TechCrunch, Josh Constine explains why Facebook doesn't allow its Facebook Credits virtual currency to be used for person-to-person payments:

"But why hasn’t Facebook built its own way for friends to send money to
each other using its virtual currency Credits? Because
of significant fraud risks and its focus on making Credits work better
for virtual goods purchases where it earns 30%."

"The primary reason Credits can only be spent in games and apps, not sent
to other users, is fraud. There are several ways for users to earn
Credits instead of paying for them, such as completing on-site offers,
or making off-site purchases that are incentivized with Credits rewards
through companies like ifeelgoods.
If users could transfer Credits to someone else, the occupation of 'Credits Miner' would emerge. These people would earn Credits any way
they could and sell them to others for more than they cost to earn but
less than Facebook sells them for. This would essentially create a
secondary market for Credits and undermine Facebook’s ability to make
money on them."

Mining for 'credits' is not necessarily a bad thing and it can tend to increase the overall demand for the nonpolitical currency unit. The so-called fraud (or unfair profit) can always be addressed by floating, rather than fixing, the exchange rate for Credits in the way that Linden Labs has done for the economy of Second Life. Constine correctly hints that the close partnership between PayPal and Facebook is what prevents Facebook from entering the payments business directly:

"To be competitive, Facebook would only be able to take a few percent on
transactions, and still it wouldn’t have the base of merchants PayPal
cultivated through eBay. Instead, Facebook is focusing on Credits as its
platform’s mandatory virtual goods payment processor for developers,
where it earns its juicy 30% cut. That business is growing thanks to
gaming giants like Zynga, so there’s no need to move into a risky sector
such as P2P payments that’s outside its core competencies and dominated
by incumbents."

While I believe that to be true for the moment, if Facebook were to
address the fraud issue and the legal and regulatory issues of two-way convertibility, it
would have an enormous opportunity that PayPal would not -- the ability to create
currency at will and earn seigniorage.

That's all we need - to abandon any pretense of government oversight over the money supply and trust Facebook instead. Don't forget that FB has is working closely with the devil incarnate Goldman Sachs on these delicate issues.

The companies most likely to be successful issuing a private currency are supermarkets like Walmart, Tesco, Carrefour etc.

They would be successful for the following reasons -

1) People would have a lot of confidence in a currency that is easily redeemable in food and manufactured goods at the issuers premises.2) Big supermarkets have huge power in the economy. Walmart turns over more than the GDP of a medium sized country. Supermarkets could easily force their suppliers to accept payment in the new currency, or lose access to the shelves. Suppliers would then have to pay their own supliers and employees in supermarket currency, accelerating diffusion of the currency.3) The supermarkets already have loyalty points scheme which could easily be upgraded to a fully fledged currency.

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2003

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995